Rising home prices made it harder to afford a home in May

A combination of stagnant borrowing costs and growing home values further put the squeeze on home buyers in May, according to the latest affordability numbers from Ratehub.ca.

The May edition of the study, which calculates the minimum annual income required to buy the average home in some of Canada’s major cities, found affordability conditions worsened in 11 of the 13 markets studied on a month-over-month basis.

The analysis, which references national real estate data from April and May 2024, illustrates how changing mortgage rates – and the accompanying mortgage stress test – as well as housing prices impact the overall purchasing power needed to buy a home across Canada.

Rising home prices offset flat mortgage rates

Despite little upward pressure on the borrowing side – the average five-year mortgage rate remained fairly flat on a monthly basis at 5.49% compared to 5.5% in April – rising home values were steep enough to push affordability further out of reach for many. The mortgage stress test, meanwhile, remains elevated at 7.49%.

The income needed to buy a home rose by the largest margin in markets with homes priced below the $1-million mark; that relative affordability means buyers have remained active compared to some of Canada’s more expensive cities, where too-stretched affordability has led to a sluggish spring.

May 2024: How much do you need to earn to buy a home in Canada?

Please note April numbers have been revised from last month’s report, based on updates made by CREA this month.

Data in the chart is based on a mortgage with 20% down payment, 25-year amortization, $4,000 annual property taxes and $150 monthly heating. Mortgage rates are the average of the Big Five Banks’ 5-year fixed rates in May 2024 and April 2024. Average home prices are from the CREA MLS® Home Price Index (HPI).

Hamilton tops the board in terms of rising required income; a home price increase of $9,400 means buyers must now earn $1,550 in additional income to afford an average-priced home as they did in April. The average home price in the Golden Horseshoe city was $868,300 in May.

That was followed by Victoria, where buyers must now earn $1,230 in additional income, based on a month-over-month increase of $7,600, with the average price now at $874,300.

Canadians may be surprised to see affordability conditions improve within the City of Toronto; buyers there required $1,250 less income to purchase the average priced home at $1,117,400. While among one of Canada’s most expensive markets, the supply and demand imbalance seen during the spring market lowered the average price by $5,900 between April and May.

Halifax, meanwhile, saw the largest improvement to affordability, with buyers requiring $2,070 less to purchase real estate, based on an average home price of $539,200 and month-over-month decline of $11,000.

June rate cut could further heat summer home prices

As Ratehub’s May analysis is based on data from before the Bank of Canada’s June rate cut, it remains to be seen whether lower mortgage rates will heat home prices further. A number of real estate boards – including the Canadian Real Estate Association – are forecasting an increase in sales in the coming months, as buyers are encouraged by easing borrowing costs.

While this latest quarter-point decrease – which brought the central bank’s key Overnight Lending Rate down to 4.75% from 5% – has had a small impact on borrowing costs, further cuts in July or September could certainly bring a renewed sense of urgency to the market. It’s a phenomenon that we’ve seen play out before in previous rate cut cycles.

The next Bank of Canada rate announcement is scheduled for July 24, 2024.

Also read:

• National real estate market stagnates in May ahead of rate cut effect
• Toronto home sales fall 22% in May as buyers await rate cuts
• What does another US Federal Reserve rate hold mean for Canadians?
• How much will 30-year amortizations cost for insured borrowers?
• Bank of Canada cuts target interest rate by 0.25% in June 2024 announcement